The Western political establishment has had another rude shock after the summer's Brexit referendum vote in the UK. The US has voted Donald Trump as president-elect, confounding the opinion polls that had pointed to a narrow win for Hillary Clinton. The question on many minds today is an obvious one: What could this mean?
Firstly, let's consider a natural rule of democratic politics. It is one thing to say things in the heat of a political campaign (and this presidential campaign appeared very divisive), but actually being in office presents different challenges and constraints. The world will be watching very closely for indications of how a Trump administration will work in practice. This morning, I have heard a journalist from the Washington Post talk of the end of the Western world, the end of NATO and the end of the rules-based system for international trade. Thirty minutes later, the message from the US ambassador to Britain was far more reassuring. Yes, there will be changes of style and policy direction ahead, but the ambassador expressed faith in the checks and balances of the US system of government to maintain stability in Washington. What was campaign rhetoric and what will be followed up by a Trump administration? We don't know, of course, but we do know that a significant body of things said on the campaign trail won't make it into action or statute. And we'll gradually get a feel for just how a Trump administration will work – in terms of approach – over the next weeks and months.
The global business community has reacted, initially at least, with negative sentiment. Stock markets are down. The dollar is taking a hit. A Clinton victory was widely perceived as one that would bring business-as-usual in terms of the outlook for the US economy and the global economy. A Trump victory throws up a number of uncertainties – for both the short-term and long-term. Political commentators note that during the presidential campaign, the statements of Trump have been rather erratic or hazy.
He seemed generally against free trade and criticised companies – such as Ford – for investing in manufacturing plants in low-cost Mexico. He seemed to say, quite strongly, that NAFTA needs to be ripped up or renegotiated. "NAFTA is the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country," Trump said in the final presidential debate. Such words resonated with a section of the US electorate that feels bypassed by much of the economic growth of recent years. Trump's narrative was that unfair trade agreements have led to the hollowing out of the US manufacturing sector and that countries like China don't play fair. The more positive news of record profits for Detroit and a healthy car market was buried in the talk of long-term manufacturing decline, plants that used to make cars and are now long gone, along with the manufacturing jobs; all victims of globalisation, international trade, avaricious bankers – take your pick.
Will a Trump administration revisit NAFTA? Board rooms in Detroit – and elsewhere – will be concerned at such a prospect because NAFTA's free trade framework with Mexico has been at the heart of sourcing strategies in North America. Cars and parts in huge volumes are shipped from Mexico to the US, although that doesn't mean – as Ford's Mark Fields has pointed out – that US automakers are not investing in the US. After he made such a big deal of NAFTA in his campaign, it's likely that a Trump administration will review NAFTA with a view to a possible renegotiation. Look out for possible fireworks.
Trump also wants to declare China a currency manipulator because of its past efforts to push down the value of its currency – boosting its exports to the US. Trump has threatened to unilaterally apply new tariffs on Chinese and Mexican imports. He has also said he opposes the Trans-Pacific Partnership (TPP) free trade deal. And prospects for a free trade deal with the EU (Transatlantic Trade and Investment Partnership – TTIP) have probably just taken a knock. This is a deal that Detroit carmakers have been enthusiastic supporters of because it offers the prospect of lower costs due to harmonised product standards. What will the tone be in the Trump administration's trading relations with the global community? Will it be one that is pragmatic or one that risks trade wars that spiral out of control and slash global economic growth?
Has the outlook for the US economy in the short-term taken a hit? The Brexit experience could be instructive here. Markets are reacting as expected to an event that is widely perceived as a net negative. In the UK we saw that in the summer. But the initial reaction takes place against a background of uncertainty and limited information. There followed a degree of stabilisation in the context of limited information and a realisation that the worst scenarios appeared to have been avoided. A similar path may be in prospect for the US economy. If the Federal Reserve believes it needs to shore up confidence, as the Bank of England did in the summer, any tightening of monetary policy perhaps just got put back. The prospect of lower interest rates for longer may just give the US economy a lift.
What will Trump's stance be on energy policy? He has appeared to want to relax rules and targets designed to meet international CO2 accords, but which impose costs on US companies. The auto business might be a beneficiary if CAFE rules for the auto sector are revised and relaxed, though even car industry insiders concede that could send a strange message at a time when car companies are heavily focused on the challenges of future mobility – which embraces a major environmental element.
Are big tax cuts coming (both to individuals and companies) and where could that leave the US economy? And what about the loud promises on new infrastructure investment? How will that be funded?
The oval office will be a busy place in 2017. Donald Trump's administration has a mandate to do things differently, that's for sure. Some things will be shaken up by what is clearly a vote against the political establishment and apparently against the forces of globalisation. But the US is a major force in the world and is 'global' in terms of the orientation of its economy and the world class companies headquartered in the US that play on a world stage. Donald Trump will now have to listen to them.